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Why Kenya is considering a Eurobond buyback

President William Ruto last week revived Kenya’s hopes to buy back its 2014 debut Eurobond, after setting a new date for the buyback between February and March, bringing the sovereign bond buyback debate back into prominence.

What is a buyback?

From the context of the sovereign (Kenya), a buyback describes the process by which the repurchase of issued securities from holders or investors before the set maturity debt is done by the issuer. In the case of the 2014 Eurobond, a buyback implies that Kenya is seeking to buy out some of the Sh320.7 billion ($2 billion) noteholders before the maturity of the bond on June 24.

Why is Kenya aiming for a buy-back?

Primarily, Kenya is seeking to break up the single substantive bullet payment in June as a liability management operation. Without the initiative, Kenya would be expected to make the entire Sh320.7 billion repayment in one sitting.

The move to opt for a buyback has been primarily influenced by inhibitive interest rates in the international capital markets, which have constrained the government’s ability to refinance the maturity through a new Eurobond issuance.

What benefits would Kenya reap from the planned buy-back operation?

A buy-back forms part of liability management which seeks to lower and smooth the debt service payments of the government, reducing the vulnerability of public debt to unexpected shocks.

For instance, by redeeming part of the Sh320.7 billion maturities today, Kenya would reduce the amount in principal due on June 24 easing concerns about its ability to make an outsized payment in one sitting.

Moreover, Kenya would mark marginal savings from interest payments due on the same date. But with only one more coupon/interest payment left to maturity, accrued interest savings would have been greater if the move had been implemented earlier.

Why did the previous buyback attempt fail?

On November 9, President William Ruto announced that Kenya planned to make a Sh48.1 billion ($300 million) early Eurobond repayment by the end of last December to reduce arrears due in June 2024.

The plan nevertheless failed to materialise after Citi Bank and Standard Bank advised on a new date in 2024, citing the suitability of market conditions.

Why have credit rating agencies warned against a buyback by Kenya?

On August 2, 2023, Moody’s Investor Service stated it would treat Kenya’s planned buyback of a portion of the 2024 Eurobond as a default.

The warning was sounded as interest rates/yields on the Eurobond had risen significantly meaning holders of the notes would be forced to give huge discounts to the government if they sold the papers at prevailing market prices.

The warning was, however, criticised by players including the African Peer Review Mechanism who termed Moody’s comments as premature since Kenya was yet to publicise the official details and terms of the buyback.

How is a buyback conducted?

A sovereign can carry out buybacks via either of two approaches. The first involved the discrete purchase of noteholders from the open market at prevailing prices with the methodology applying for smaller buyback portions.

Larger buybacks, more than 10 percent of the principal due, such as Kenya’s are expected to be executed via a tender offer, which details the price to be paid to holders.

How does Kenya plan to fund the buyback?

Kenya’s planned buyback would be a cash buyback financed through a drawdown of official foreign exchange reserves.

Kenya’s official reserves have recently seen a bump from new hard currency inflows from the International Monetary Fund and the Trade and Development Bank, making available a significant pool of resources to meet potential early redemptions.

The reserves are further expected to receive boosting from other expected flows including from the World Bank and the African Development Bank.

What alternatives are there for Kenya should a buyback fail?

Another failure of a buyback for the 2014 Eurobond would not be terminal as Kenya has other options to settle the maturity, handing it a proverbial two stones to kill a single bird.

Alternatives for Kenya are premised on meeting the entire maturity at its due date of June 24.

As an option, Kenya can draw on the official reserves to make the bullet payment with the reserves already standing at Sh1.1 trillion ($7.134 billion) as of Thursday last week, according to data from the Central Bank of Kenya.

Moreover, Kenya could yet issue a new Eurobond upon the improvement of market conditions, acquiring new resources to settle the maturity.

Already, market conditions for emerging and frontier economies have improved as mirrored by the recent Eurobond issuances by Coté D’Ivoire and Benin.